Large Business Bulletin: May 2011
Large Business Bulletin: May 2011
Downloading the bulletin
From the Deputy Commissioner, Large Business and International
Welcome to the latest edition of the Large Business Bulletin.
Over the last few years, we have continued to work with taxpayers in the large market to provide greater certainty and encourage willing participation in the tax and superannuation systems.
Our method has been to deliver on the commitments in the Large business and tax compliance booklet and embed our risk differentiation framework (RDF) across the large market. These are both part of our commitment to ensure that our services are focussed on:
- making it easier to comply with tax laws
- supporting voluntary compliance
- helping to reduce compliance costs
- making sure that the right amount of tax is paid in Australia.
We have been working with the large market to develop a new reportable tax position (RTP) schedule. This schedule will be used to provide greater assurance and align Australia with international trends toward greater transparency by large businesses.
The lead article in this edition provides more detail on what the RTP schedule will involve and the guidance materials that are being developed in consultation with representatives from large business.
This edition also includes articles on the risks that attract our attention, the new practice statement for our Advance Pricing Arrangements and an update on the Lead Relationship Manager service.
In the next edition of the Large Business Bulletin we will include an update on our implementation of the RDF in the large market. We are working to provide risk ratings across several taxes that will allow taxpayers to better manage their relationship with us.
Large Business and International
Australian Taxation Office
We are developing a new reportable tax position (RTP) schedule to the 2012 company tax return.
This schedule is part of an information disclosure package designed to:
- provide greater assurance to businesses about their most contentious and material tax risks
- help us better understand tax risk for large businesses.
The Commissioner of Taxation, Michael D'Ascenzo, made mention of this new approach in various forums during 2010. The intent of the new schedule is to require the disclosure of those '…material issues that a robust governance process would escalate for the attention of senior management'.
By expecting large businesses to disclose these tax risks, we are acting consistently with wider international trends that require large businesses to be more transparent.
What is an RTP?
A reportable tax position is any of the following:
- a material position that is not more likely to be correct than incorrect
- a position in respect of which uncertainty about taxes payable or recoverable is recognised and/or disclosed in the taxpayer's or a related party's financial statements
- a position in respect of a reportable transaction.
If the position has otherwise been adequately disclosed to us it does not have to be reported on the schedule.
The RTP schedule and the definitions that support it are subject to consultation and may change. For the most up-to-date draft schedule and definitions, refer to Reportable tax position schedule.
Introducing the new RTP approach
We will test the new schedule with large business.
Initially, it will apply to corporate taxpayers we notify; that is, those we assess to be 'higher risk taxpayers' or 'key taxpayers' under our risk differentiation framework.
It will apply to income years beginning on or after 1 July 2011 and include a basic disclosure requirement for those RTPs that exceed a materiality threshold.
Designing the schedule
We are designing the schedule in consultation with representatives from the Large Business Advisory Group and the National Tax Liaison Group. We have established working groups and are developing guidance materials that outline the reporting requirements, definitions, impact of non‑disclosure and other key issues.
As we highlighted in the December edition of the Large Business Bulletin, we are continuing our focus on the wide range of issues detailed in the Compliance program 2010-11.
The following are just some of the risks relevant to large businesses.
Profit shifting, international and cross-border transactions
This is the use of arrangements between Australia and offshore affiliates to shift or shelter profits.
We are maintaining our focus on these transactions through arrangements we have in place with our offshore affiliates. We have also updated our risk profiling and assessment activities so that they are better aligned to our Risk Differentiation Framework.
Specifically, we continue to focus on transfer pricing and related international risks associated with:
- business restructures
- guarantee fees and intra group loans
- global profit/loss allocation
- supply/acquisition of property for non-arm's length consideration.
We have recently issued two new taxation rulings that set out our views on the way the transfer pricing provisions in Division 13 apply in Australia's tax treaties. These rulings are:
- TR2011/1 in relation to business restructures
- TR2010/7, which explains our views on how the thin capitalisation provisions in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) interact with the transfer pricing provisions.
Corporate restructures, mergers and acquisitions
These are arrangements where taxation and economic outcomes are not aligned and are unnecessarily complex.
We issued tax determinations, TD 2010/20 and TD 2010/21. These relate to treaty-shopping arrangements designed to avoid Australian tax on the disposal of investments acquired in a leveraged buy-out by private equity.
Two further draft determinations, TD 2010/D7 and 2010/D8, were released on 1 December 2010. These relate to determining an Australian source when private equity funds sign a leveraged buy‑out contract and the application of treaty benefits through fiscally transparent limited liability partnerships.
We have written to private equity firms to inform them of these determinations and encourage them to engage with us to so we can provide greater certainty in terms of their tax positions. We are also conducting a number of risk reviews.
An area of concern is the recent trend in demergers being undertaken in conjunction with a contemplated, pre-determined sale of either the demerged entity or the head entity of the demerger group. The question as to whether such schemes are genuine demergers needs to be considered. In such cases taxpayers might need to consider whether section 45B or Part IVA could apply to these arrangements.
Consolidation risks include unintended or inappropriate income tax outcomes where there are complex interactions between the consolidation provisions, other parts of the tax law and external regulatory frameworks.
We are currently profiling cases that include the following:
- exits and re-entries to the same economic group where the economic ownership has not changed
- arrangements that allow the tax-free disposal of underlying assets (Division 855/ Multiple Entry Consolidated groups involved).
Our main concerns with these cases are:
- the refreshing of asset values on re-entering
- the avoidance of capital gains tax on exits.
Some of these cases have now progressed to the risk review stage.
Research and development claims
We are focussing on research and development (R&D) claims that incorrectly classify normal business activities as R&D and wrongly allocating related expenditure to R&D activities.
The areas we are paying particular attention to include:
- non-compliance with 'own behalf' rules
- failure to correctly apply feedstock rules
- misclassification of operating expenditure as relating to R&D
- wrong classification of expenditure as between R&D categories.
We have released a new practice statement on Advance Pricing Arrangements (APA) that provides guidance for taxpayers, their advisers and our staff on the renewed APA program. It replaces the previous guidance on APAs - Taxation Ruling TR 95/23.
We co-designed the practice statement with the accounting profession and the Corporate Tax Association. It includes a statement of mutual expectations, which promotes frank and open dialogue between us and the taxpayer, and a joint commitment to develop an APA
Under the new APA program:
- issues are identified upfront in the APA process
- the approaches to resolving issues are agreed with the taxpayer to avoid surprises in the analysis phase of the APA.
The renewed APA program includes a range of processes to meet the increasing demand for APAs and the range of transactions for which APAs are being sought. We now have APA processes to deal with simple, standard and complex international related party dealings, as well as a streamlined APA renewal process.
As at 31 March 2011, we had 116 APAs (80 unilateral, 34 bilateral and two multilateral) in place - that is, 59 with large business and 57 with small-to-medium enterprises.
Our Lead Relationship Manager (LRM) service was announced by the Commissioner, Michael D'Ascenzo, in his speech - In the best interests of Australia - to the Corporate Tax Association Convention on 15 June 2009.
We offer this service to a selection of Australia's largest businesses with a view to building relationships and trust, and increasing voluntary compliance. LRMs help these businesses better manage their tax, employer and super obligations through these cooperative and purposeful relationships.
Though participation is voluntary, businesses to which we have offered a LRM must show a genuine desire to work collaboratively with us.
The benefits of the LRM service include:
- timely access to decision makers and experts
- better understanding of the ATO position and tax risk exposure
- faster resolution of issues and irritants
- coordinated scheduling of active compliance activities
- reduced compliance costs.
We allocate LRMs based on their knowledge of the industry, business, client and area of expertise that would best suit the client's tax obligations and concerns.
In 2009, we invited eight large companies to work with us to co-design the LRM model and pilot the service.
Updates on the progress of the pilot were made to the Large Business Advisory Group (LBAG) who we consulted to assist in developing the LRM model.
After a successful pilot that stretched over a year, the Commissioner announced an expansion of the service. As a result of this, 19 large corporate taxpayers now have an LRM.
Get the lowdown on mergers and acquisitions
In January 2011, we published a guide to merger and acquisition (M&A) transactions, which we developed in consultation with members of the Large Business Advisory Group (LBAG).
If you operate a company, this guide will help you with your governance and risk management. It also reflects recent changes in law and reporting for M&A transactions.
The guide is based on a framework we first developed for ATO staff in 2008. This framework provided guidance about:
- M&A transactions and how they fit into the corporate life cycle
- the commercial drivers that may prompt M&A transactions.
We have received positive feedback from LBAG members about the new guide. One LBAG member commented 'knowing this will help lead to better efficiencies when taxpayers and the ATO work together.'
The LBAG meets quarterly to discuss ways to improve the administration of the tax and superannuation systems, and lower compliance costs.
Due to recent law amendments, the scrip for scrip rollover provisions in relation to takeovers and mergers approved under the Corporations Act 2001 (Corporations Act) have changed. These amendments apply to capital gains tax (CGT) events that happen on or after 6 January 2010.
The new laws will better align the capital gains tax scrip for scrip roll-over requirements in Subdivision 124-M of the Income Tax Assessment Act 1997 with the Corporations Act. This will make it easier for takeovers and mergers regulated by the Corporations Act to qualify for the rollover.
Following a recommendation by the Inspector-General of Taxation, we have developed a new page on our website called 'Significant technical issues'.
The new page contains information about priority technical issues (PTIs) and strategic litigation.
PTIs include public rulings and Law Administration Practice Statements (LAPS), and are managed by our most senior technical officers. These high-risk issues are given a 'priority' assessment.
Strategic Litigation refers to our highest priority cases - the outcomes of which are of interest to the Commissioner or the public.
The new page also contains links to:
- the published Public rulings and LAPS programs
- published minutes of the National Tax Liaison Group
- a new PTI internal advice page.
If your employees work overseas temporarily, you may have to pay double super. This happens when the country in which they work also requires super (or equivalent) contributions to be made for that employee.
Australia currently has bilateral agreements with the following countries to avoid paying double super: Belgium, Chile, Croatia, Finland, Greece, Germany, Ireland, Japan, Korea, Norway, Poland, Portugal, Switzerland, the Netherlands and the United States of America.
In addition to these countries, a new agreement with the former Yugoslav Republic of Macedonia is expected to start on 1 April 2011.
To take advantage of the super provisions in these agreements, you must apply to us for a Certificate of coverage. The countries listed will accept this certificate as proof that the employer or employee will be subject to Australia's superannuation guarantee law for the duration of the secondment.
We recommend you apply for a Certificate of coverage before your employee leaves Australia.
From 1 July 2010, important changes have impacted the status of some of our publications so you should consider the level of protection provided to you if you rely on the advice in that publication.
We have released a table which outlines your level of protection from 1 July 2010 when relying on indirect tax advice and guidance products relating to any of the following:
- goods and service tax (GST)
- luxury car tax (LCT)
- wine equalisation tax (WET).
If you have an agreement with a super fund to pay fund expenses, such as insurance premiums, these amounts are concessional (pre-tax) super contributions and will count towards your employees' concessional contributions caps.
The concessional contributions cap for 2010-11 is:
- $25,000 for your employees who are not yet 50 years old
- $50,000 for your employees who are 50 years old or over.
We recommend you advise your employees if you have paid their super fund expenses. This will help them manage their contributions, avoid exceeding their annual concessional contributions cap and avoid paying extra tax.
If you are a decision maker in a small-to-medium enterprise (SME); that is, an enterprise with a turnover of between $2 million and $250 million, then our SME Tax Forum and e-newsletter SME Communicator are for you.
The SME Tax Forum is an online community that provides SME business operators and decision makers with opportunities to:
- discuss business and tax issues
- participate in discussions and surveys
- join members-only online seminars (webinars)
- participate in live chats with senior ATO executives.
This members-only site enables SMEs to share their business experiences and to work with us to identify opportunities to make it easier to meet their tax obligations and reduce compliance costs. Member participation is actively shaping how we serve SME clients.
The SME Communicator has been developed as a direct result of online consultation with SME Tax Forum members. Forum members told us they wanted regular updates about important issues specific to SMEs. Produced monthly, the SME Communicator responds to this demand by providing information on topics specific to SMEs including tax, super, new initiatives and updated information on products and services.
Visit our website
- Find the latest public rulings relevant to large businesses.
- Read the latest speeches by the Commissioner and other ATO leaders.
If you have any questions about tax matters for large business, phone us on 1300 137 286, Monday to Friday, 8.00am to 6.00pm.
The Large Business Bulletin is issued quarterly. If you have any suggestions or feedback, email Largebusinessbulletin@ato.gov.au
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Last Modified: Monday, 23 May 2011